The financial crisis of 2008 beckoned change for Nick O’Donohoe after almost 30 years in investment banking. In 2011, he founded Big Society Capital and later specialised in blended finance at the Bill and Melinda Gates Foundation, where he is a senior adviser. He was named CEO of UK development finance institution CDC in March 2017. Jack Aldane met with O’Donohoe to discuss what influenced his trajectory and how he plans to execute CDC’s latest strategy created alongside the UK’s Department for International Development (DfID).
What personal convictions led you to take the position of CEO at CDC before this was announced back in March 2017?
My first involvement with what you’d describe as ‘social investment’ broadly began in about 2007-2008 at JP Morgan. That was when I was asked to supervise a social finance group, which they were setting up. I suppose the question really was whether to combine investing for both financial return and impact. That was a new question for many people in the mainstream financial sector, but it was a very old question for many people in the development community. For me, it was my first entrée into this field. And I suppose my principle motivation, other than I suppose, some interest in the theoretic in that question, was a conviction that how our capital is used makes a profound difference to the world we live in. Simply ignoring the consequences and the externalities of the investments we make is not going to lead us to a fair and just and prosperous world. That’s why I was interested. Now, that also coincided with the start of the impact investment movement, and I was a part of that. Also the financial crisis, which I think led to a certain sort of disillusionment with mainstream finance, and which encouraged people to ask that question. Development finance institutions have been investing for profit and purpose for about 70 years, which is when CDC started. They are the obvious extensions of what I was doing after starting Big Society Capital, going on then to the Bill and Melinda Gates Foundation, then on to here. The thread that runs through all of that is my conviction that capital can create a huge change.
Your entrance into CDC brings with it the group’s latest strategic framework for 2017-2021. Central to this framework is your determination to increase CDC’s impact, with job creation at the top of the pyramid. How will you ensure that the jobs created amount to decent work for people in developing countries?
Well I think you’re right, and though I don’t think it necessarily involves a profound change in how CDC is doing things, but it does involve some sort of evolution in how we’re telling our story and how we’re articulating the value that we’re bringing. We’ve been very focussed on job creation. We’ve had, as you probably know, a development grid that incentivises the organisation towards tougher countries and more job creation industries. I think that remains at the heart of any development finance institution. That doesn’t change, but you’re right in that what does change is that job’s metric. It’s not just any job; it’s a decent job. CDC has always been very conscientious about the way we, from a compliance perspective, ensure that when we invest in companies, they meet certain standards in terms of minimum wages, health and safety standards, avoiding any child labour and so on. What’s changing among development finance institutions is a move away from simple compliance to active engagement with the companies that we invest in to ensure that they have all the checks and balances in place, so that the jobs they are creating are good jobs. Before I started here I had an induction for two months where I was able to travel to countries in East and West Africa and Myanmar, to see some of the companies we’re investing in. One of the things that really struck me was that the impact we’re having goes way beyond job creation. M-KOPA, which provides solar panels, has created quite a number of jobs, but it’s really about the half a million households that now have access to electricity and are no longer using kerosene lamps.
CDC committed US$357 million to fund managers in 2016, catalysing a further US$316 million of private sector investment to funds, and then another US$227m from earlier fund commitments. You’re looking to mobilise even more private capital. How are you going to do this?
I’d say it is still relatively early days in our mobilisation strategy. There are fundamentally four ways we can do that with CDC’s business model. We can cornerstone funds and then help those funds access other LPs. The numbers that you refer to – that’s principally what we’re doing. We’re providing the cornerstone funding – and we did a lot of this sort of thing with Big Society Capital – that get GPs off the ground and give others confidence that they’re credible and that proper due diligence is being done. The question now is how much more we can do. One thing we can do is to help our managers raise more money. The second area in which we can mobilise more capital is in the direct transactions we do. That’s both on the equity side, where we typically make direct equity investments, and on the debt side by helping to originate more transactions. The third thing is being a market champion. We have an enormous amount of data here and experience of investing in our markets. I know from my time of working in the impact investment market that there is an enormous appetite to do more in terms of investing in the sustainable development goals, but knowledge of what is possible is pretty limited. No one has a deeper reservoir of knowledge than CDC.
Before becoming CEO of Big Society Capital in 2011, you were global head of research at JP Morgan. What drove you to depart from an investment bank to pursue business in the interest of social and economic impact?
First of all, by 2011 I’d been in investment banking for 28 years. That’s a long innings. I got involved, although it wasn’t my day job, in the supervising role I mentioned earlier with this little group the bank wanted to set up. I just became really interested in the whole area of impact investment. I then got asked to work with Sir Ronnie Cohan to set up this organisation, which the government at the time had committed to launch, funded with unclaimed cash left in dormant bank accounts and commitments from the four largest high street banks. People say to you “If you’re really lucky once in your life you get the chance to do something that’s really unique and different and worthwhile, you take it.” For me, the opportunity just happened to come along at a good time, because I’d been in banking long enough. I think I had this view that capital needed to have a higher purpose. I don’t say that in any negative or critical way, I was lucky to work at two very well managed institutions, but it was at a time in my life when I knew I could do something different.
On that subject, it would be interesting to know how you see CDC in relation to the UK taxpayer. To what extent is financing development an increasingly preventative measure for developed countries?
The reason that DfID [the Department for International Development] is backing us is much more a function of the fact that, when you look at the data, no country has ever developed successfully without a thriving private sector that creates jobs, pays taxes and builds infrastructure. That need for a thriving private sector has been reinforced over the past few years through the launch of the sustainable development goals and the conferences in Addis Ababa and Paris, all of which have focussed on the point that if we’re going to achieve the goals, we’re going to need a lot of private sector capital. I think the public do embrace development spending as a whole. It’s clear from the fact that every major UK party endorsed the 0.7 percent GDP spend ahead of the last election. And, while there’s an increasing understanding of the need for private sector development and the role of institutions like ours, I also think it is important we tell our story and that we help the public understand why it is important that developing countries have thriving private sectors and why they should support CDC as a development finance institution.
Finally, what would you say you’re most anxious to achieve in your first year as CEO?
This is sort of a boring answer I know, but we now have a strategic framework, developed and published with DfID, and we have a task to figure out how to operationalise that. We have to ask what that means in terms of how we’re organised, the resources we need, whether we need more people on the ground in the countries in which we’re active. We need to think about this in terms of how we think about sectors and products. This is all quite internally focussed stuff, but given where we are and where I came in, it’s important that we focus on operationalising it. Within that, the key parts are development impact, mobilisation, transparency, and how we tell our story so others can understand what we do.